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USi Hosting Future Uncertain

Amid layoffs and increasing debts, company can choose Chapter 11 or become private Bain division.

ASP pioneer USinternetworking Inc. is in a state of transition, teetering between its bankrupt mentors and the protégés whove stolen its momentum in the hosting space.

Symptoms of trouble are numerous at the Annapolis, Md., company, which hosts and manages software and Web sites for its clients. Most of USis sales and marketing staff have been laid off, sources said, and debts from costly data centers and software licenses are accumulating.

USi officials have said the $100 million in funding they announced having received last month from Bain Capital Partners LLC includes certain criteria but didnt give specifics, sources said.

Users, many of whom purchase Web hosting but no managed applications, are readying contingencies just in case the worst happens.

Further reading

Now, industry experts say, USi can move in one of two directions—toward Chapter 11 or to the relative luxury of being a private division of Bain, the Boston venture company that also rescued application service provider Interpath Inc. in May last year.

"It really wouldnt surprise me [if USi goes bankrupt]," said Lew Hollerbach, an ASP analyst with Bostons Aberdeen Group Inc. "From a straightforward business point of view, why does anybody file for bankruptcy? Its when you cant pay your debts. ... Thats the only thing theyve got control over."

Bain officials would not comment. USi officials refused interview requests but provided a statement from USi CEO Andy Stern. "We are excited at the possibility of having Bain Capital as a partner to help build our business and capitalize on opportunities in the growing ASP marketplace," the statement said.

But customers are skeptical. "Were just as concerned as we should be. We are certainly in the process of talking to other hosting companies," said two-year USi customer Bob Stetzel, director of development at Yankee Candle Co. Inc., in South Deerfield, Mass.

Despite USis claim, experts say that any growth will be at best sideways, not upward. Many view the companys situation as symbolic of the end of the horizontal ASP era and the beginning of a new generation led by small, verticalized companies, such as Salesforce.com Inc. and Oracle Corp.s NetLedger Inc. subsidiary.

"They just have a lot of misplaced ego," said Kneko Burney, an analyst at Cahners In-Stat Group, in Scottsdale, Ariz. Bankruptcy, Burney added, "would put a deep stake in their heart. ... Its time to be realistic."

USis problems could refocus a spotlight on its direct rivals, such as Corio Inc., of San Carlos, Calif. Jamcracker Inc., of Cupertino, Calif., may also face scrutiny, as rumors circulate that it may be acquired by IBM.